{"id":4104,"date":"2023-10-22T01:16:07","date_gmt":"2023-10-22T01:16:07","guid":{"rendered":"https:\/\/infundpros.com\/markets\/rates-spike-sentiment-softens-real-inflation-already-at-target\/"},"modified":"2023-10-22T01:16:07","modified_gmt":"2023-10-22T01:16:07","slug":"rates-spike-sentiment-softens-real-inflation-already-at-target","status":"publish","type":"post","link":"https:\/\/infundpros.com\/?p=4104","title":{"rendered":"Rates Spike, Sentiment Softens \u2013 Real Inflation Already At Target"},"content":{"rendered":"
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The relentless upward spike in interest rates continued this past week despite Fedspeak implying that the Fed will continue to be in \u201cpause\u201d mode, at least at the November 1st<\/sup> meeting. Rates on 10-Year Treasury Notes closed on Friday (October 20) at 4.91%. During the trading day, the 10-Year almost pierced the 5% level (4.995%) before retreating at the close (see chart). We think it is likely that a 5% handle will occur this coming week.<\/p>\n

Earlier in the week, FOMC (Federal Open Market Committee) member Waller said that, since monetary policy acts with a lag, the Fed should \u201cwait and see\u201d what results occur from actions already taken. That was in line with several other recent FOMC speakers, and it is obvious that the Fed will stay \u201cpaused\u201d at its upcoming meeting set. Powell and several other FOMC members have indicated that the up-spike in rates has clearly tightened financial conditions and its \u201cdoing the Fed\u2019s job\u201d for them.<\/p>\n

This up-move in rates appears to be out of step. Less hawkishness is supposed to trigger lower, not higher rates. We did come across a Bloomberg article from October 18 titled \u201cChina Sells Most US Securities in Four Years\u2026\u201d The article said \u201cthe bulk of the $21.2 billion of sales were in Treasuries and US equities…\u201d So, that may be part of the issue. But we think there is more to the story.<\/p>\n

As we indicated in our last blog, the Middle East hostilities carry economic consequences. One of those, we think, is the rise in interest rates. Note the spike up in the chart coincides with the start of the middle east hostilities. With more risk in the world, we think that the \u201cmarket risk premium,\u201d (the \u201creal\u201d after inflation required return) has moved up; thus the rise in rates despite the Fed making it clear that they are still on \u201cpause.\u201d<\/p>\n

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While nearly all of the sentiment indicators are falling, the real data continue to paint a picture of an economy that is still chugging along. Of course, the most recent data are subject to revisions, most of which, of late, have been negative.<\/p>\n

Take the jobs data: Initial unemployment claims are hovering around 200K. While that may, at first, appear to be a large number, it isn\u2019t. It represents normal employment turnover. Yet, we are seeing layoff announcements rising. Challenger, Gray and Christmas say layoffs are up +58% from a year earlier and we\u2019ve had some large layoff announcements. This past week (ending October 21) Nokia announced layoffs of -14K, Scotiabank -3% and Nestle -542 positions. Meanwhile the five largest banks (excluding JP Morgan) have laid off -20K so far in 2023, and we are told that the biggest cuts are yet to come. As a result, we expect rises in Initial Claims and the Unemployment Rate.<\/p>\n

The consumer held up better than we thought in Q3. Real Retail Sales rose 1.7%, and we expect Q3 GDP, to be announced at month\u2019s end, to be in the 4%-4.5% range. Some economists have pointed out that much of the buoyancy in those retail sales was due to something they called \u201cexcess savings,\u201d a polite term for the $5 trillion of free money from pandemic fiscal policies. That \u201cexcess\u201d was finally exhausted in Q3 they say (see right-hand side of the chart).<\/p>\n

And we may now be seeing the first signs of a pull-back in spending. Redbook reported that same store sales fell -2.2% in the first half of October. In addition, in order to \u201ckeep up\u201d with inflation, consumers have relied on their credit cards. If one normally fills up their gas tank by paying with a credit card, then higher gas prices raise the amount of the credit balance. Same with other retail purchases. There are three problems here:<\/p>\n

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  1. Consumers soon reach their maximum credit balance;<\/li>\n
  2. The minimum monthly payment rises;<\/li>\n
  3. This results in rising delinquencies.<\/li>\n<\/ol>\n

    To make matters worse, the banks have tightened lending, not only to consumers, but to businesses. This is sure to have an impact on economic growth going forward.<\/p>\n

    Sentiment Indexes<\/h2>\n

    All the sentiment indexes are also downbeat. These indexes tell us the mood of businesses or consumers and give us a perspective on the future.<\/p>\n